Are Federal Executives Underpaid?

Responding to the calls to “fix the VA,” Howard Risher, a Wharton MBA/PhD and editor of Compensation and Benefits Review, argues that paying its senior managers more competitive salaries is necessary to attract talent.

A CEO has to have people who are committed to making the changes needed to correct problems. In this situation that could include hospital-level executives who allowed the appointment scheduling problem to continue.

In the current climate those jobs are not likely to be seen as attractive career moves. Aside from the political pressure, the fact is those jobs are severely underpaid. Anyone with proven credentials in health care management in both not-for-profit and for-profit hospital systems is making far more than the salaries paid under the SES system. Sacrifice is normally expected but here the truly qualified individuals already have jobs where they have the satisfaction of working in health care—and are paid far more.

[...]

Executive compensation levels in health system organizations rival those in other sectors. The 2013 total compensation of the CEO of Universal Health Services Inc. (a large for-profit system where I worked for a time) was reported to earn $13 million in 2013 when all elements of his package are considered. At least half a dozen Washington-Baltimore health system/hospital CEOs were paid more than $1 million in 2012. The highest was paid $2.6 million. Even rural community hospitals typically pay their CEO $500,000 to $1 million.

Salaries in that range are common for the highly regarded systems across the country. Dr. Delos Cosgrove, the CEO of the Cleveland Clinic and a name that has surfaced as a possible new VA Secretary, earned a base salary of $2.278 million in 2012. His total compensation was $3.2 million. His counterparts at the Mayo Clinic and Giesinger made less but in the same ballpark.

The more germane issue is the pay for jobs similar to those held by SES members. Cosgrove’s chief of staff was paid $1.09 million. His chief legal officer earned $641,000 and his chief financial officer earned $902,000. In a relatively small hospital system close to my home in suburban Philadelphia, the CFO was paid $692,000 in 2010 and the chief legal officer, $472,000.

Note that Risher isn’t talking here about the Secretary for Veterans Affairs, whose salary is $199,700. While that’s still paltry by private and nonprofit sector compensation, there’s tremendous prestige in being a cabinet secretary and, frankly, most of the candidates for those positions are independently wealthy. Instead, he’s referring to the faceless senior managers, many of whom are career civil servants who rose through the ranks but others of whom are recruited from outside government.

The VA, in particular, has to be hard pressed to find managerial talent at any price. It’s been broken for years, is under intense political scrutiny, and vastly under-resourced.

The problem with paying its senior executives more—aside from the political difficulty in getting Congress to change the law and the fact that doing so will naturally lead to cries of “What about us?” from other agencies—is that the higher salaries would apply to everyone. It’s one thing to have flexibility in hiring a proven “fixer” from outside government. But, of course, we’d also be paying more to those who’ve been there for years and therefore partly culpable for the current mess.

Comments

There is no flexibility in Federal civil service, but it sure would be nice to establish a series of highly-paid ‘super administrators’ that had power to implement serious change. But, it’s just fantasy.

Of course, free enterprise executives receive merit pay, or get fired, depending on performance. That wouldn’t work with the federal employment rules. Don’t know if you could add a top executive level that would get competitive pay under competitive rules and not end up being a political toy.

There are advantages to the Civil Service System and its rules, but one of the disadvantages is that it makes it very hard to reward people based on performance, and next to impossible to fire people based on bad performance.

@Scott: Executive compensation at the very upper end is crazy. At the same time, you’re not going to be able to lure away a proven administrator who’s making $500,000—much less $1.5 million—a year if all you can offer is $181,500 and a dose of political bullshit.

@Doug Mataconis: A lot of SES positions lack traditional civil service protections—they’re term appointments with no career status.

Oddly, my own position—which isn’t in the SES—is of that variety. I started with a two year contract that was really a one year contract, since Year 1 was probationary. Subsequently, I’ll be eligible for four year contracts indefinitely.

The comparison is problematic for any number of reasons. The federal officials being described aren’t CEOs, don’t bear risk, and don’t have the same budget responsibilities as a CEO. They also aren’t responsible for increasing worth.

I think there’s a reasonable complaint about excessive pay for top level private sector management. I don’t think that complaint is nearly as valid for mid-level managers.

A better comparison would be a department manager for a large corporation. A department manager at Ford Motor Co. earns about $200K, has benefits that are slightly worse than the VA Secretary’s, and considerably less job security.

Another problem is title inflation within the federal government. I recently had occasion to do some research into this. I found individuals with no management responsibilities having the title of manager and what were essentially management trainees being given the title of director.

Yet another complication is the absurdly inflated salaries within healthcare.

This reminds me of other pay analyses I’ve seen. In general, these analyses indicated that federal employees at entry level earn more than their counterparts in the private sector, but that these pay differences smoothout somewhat in the middle levels … but that high-level civil servants earn quite a bit less than their private-sector counterparts.

@James Joyner: This is true. I would also follow-up with the thought that successful private sector and public sector skill sets are very different. That is why the idea that talented business people are good for government work and vice versa is not very true. There are very few who are good at both.

@Dave Schuler: Good comparison in size, VA 280,000 people, Ford 218,000 people. VA CEO $200,000, Ford CEO $23,000,000.
It would be interesting to see at what level private and government pay actually match, if ever. Our local VA hospital has about 2,000 employees, how big is a Ford department?

The problem here is that I have yet to be convinced that most CEO’s are worth their salary (not that I think there should be a law about that). I am doubly not convinced that highly-paid “super administrators” would be a good idea. First, it crosses me as looking for a messiah — some genius that is going to single-handedly turn things around. Second, the rules of how our executive agencies work are *very* hard to change. Bureaucratic cultures are entrenched and sub-agencies and bureaus are practically set in stone. In the end, these super-administrators would be tied down by the same rules that tie down the current administrators.

If you look at private businesses that have been turned around, it has usually come about by basically burning them to the ground. They fire a huge fraction of the people, break up divisions and rebuild the company. They do this not because they are jerks but because corporate culture is very hard to change, especially when most of your employees’ thinking is guided by the old culture. To change things, you sometimes have to smash them first. Our executive agencies have no mechanism for this (and civil service protections are intended to prevent mass firings). Unless you get a top-down reorganization from Congress or the Executive, I don’t see any of our federal agencies being fixed, even if we hire a bevy of super-administrators.

Even if the VA job paid in the same ballpark as industry, I would not take it. The scrutiny and level of personal vituperation that goes with the job is surely going to be a deterent. Huge institutions, the VA has 150 hospitals and a couple of thousand clinics, are bound to have problems and missed goals just like every other human activity. In our political climate, there will be a couple of hundred politicians from the other party and several thousand media people ready to drag the director through the mud for every shortcoming. There is no glory in being a VA director, and the only previous one I can name is Max Cleland whose political career was not helped by his service in the job. It is not a stepping stone to anything bigger.
Our public institutions are heading toward a death spiral.

Good post James. I would also pick up on something you noted in passing “frankly, most of the candidates for those positions are independently wealthy”. By constraining pay at the top, both in the cabinet and in Congress, we effectively restrict our most important public leadership positions to the rich. The reason why most people at that level don’t understand the lives of working class and poor Americans is because they have never had that experience and don’t know anyone else who has either.

Outside of high minded appeals to “public service” which the cynical side of me tends to dismiss, what real incentive do they have to do a better job?

The people I’ve known who have been in those jobs want to do them well. In spite of the stereotype that civil servants don’t care, it’s rare for someone to become a manager unless they are driven to do a good job simply because they want to do their job well. Call it professional pride, but it’s there.

Of course, it doesn’t help that some people spend all their time accusing all civil servants of being lazy leeches who don’t really work for a living.

There was a considerable amount of shock about Jack Welch’s compensation package but there wasn’t any doubt that he had added to GE’s value by orders of magnitude over what he was paid.

What comparable measure of performance would you suggest be applied to public sector managers? I think the comparison is specious but I’m open to suggestion.

The Secretary of the VA isn’t a CEO. If you’re grasping for a comparison the CEO is the president and the Congress the Board of Directors.

The issue is management responsibility not raw head count. Private sector CEOs have considerably heightened levels of responsibility for which there really is no public sector comparison.

As I said in a previous comment, I think that concerns about excessive executive pay are warranted. I doubt that most Fortune 500 CEOs are worth their out-sized pay but it’s up to the stockholders to decide that. I’d like to see higher standards of corporate governance.

That still doesn’t mean that calling a political appointee a CEO will mean that he or she has the same responsibilities as a priivate sector CEO. It just doesn’t work that way.

You do realize that the SES grades were intended to solve the problem that it was impossible to pay someone a competitive salary under the Civil Service salary grades, right? If you’re an SES, you’re already getting paid more than the more experienced career civil servants who work for you (and who tend to refer to Secretaries and Under Secretaries and SES’s as “the temps”).

I can’t imagine anyone wanting to be a senior-level manager in a federal agency these days. You’ll be paid less than your market value, you’ll have a crappy office in a deteriorating building, you’ll have no authority to hire or fire people, your organization will be massively underfunded by a Congress that will then hold you responsible, and half of the employees in the chain below you will be dead weight. The capable people trying to do the job right (and there will be some) will either burn out and leave, or become passive-aggressive bureaucrats working against your initiatives until you move on.

There are exceptions, notably in government laboratories and such. But the “human services” branches are a vast morass, caught in a Catch-22 of incompetence and underfunding.

Talk about mixing apples and oranges. My focus was on the executives responsible for the VA hospitals and other patient care facilities. I never said they should be paid fully competitive comp packages — nor did I justify the pay of the execurtives running other hospital systems. I smply wanted to highlight the magnitude of the gap today.

But its asking a lot for a successful healthcare executive like Cosgrove to go from $2.8 million to $200,000. The VA will need proven executive talent to change the culture and the way it operates. I am not the person to decide if external candidates will be needed but it would be asking a lot to expect any successful hospital executive to take those jobs.

In a prior column I argued the basis for bonuses is part of the problem. There is absolutely no reason why VA executives cannot be held accountable and rewarded for true performance.

I spent time in a couple of VA hospitals when I managed the pay reform project in 1990. They are not the same as an acute care facility but the differnces are not significant. Experienced executives are needed. Its the old story of herding cats. This is not a military style operation.

Private sector CEOs have considerably heightened levels of responsibility for which there really is no public sector comparison.

If we mean “responsibility” in terms of job security then sure. If we mean responsibility in terms of responsibility then it’s the opposite that’s true.

We have guys leading wars and essentially overseeing the building of entire countries for less than 200k a year. Let the FAA have a mid-air collision and see what kinds of heat gets generated. There may be no profit incentive in not killing hundred of people, but that’s a rather simplistic way to explain responsibility.

I think this conversation lacks a realistic view of private industry. I would guess that, on average, private hospitals are run no better, or perhaps worse, than VA hospitals. I’m talking about in a business sense here, as I know that the VA system clinical outcomes are better, on average, then the private outcomes.

The general public has an incredibly one dimensional view of private industry. It was painfully funny to listen to the endless chattering about the Obamacare website failures. If you can find a well experienced VP of IT of a major US corporation who can’t name at least a dozen similar fiascos in the private sector, then he’s either a liar or… Actually I can’t think of anything else. ‘Liar’ will have to do.

@MarkedMan: Yes, it’s true that government doesn’t perform as badly or the private sector as flawlessly as people commonly believe. I’m amazed at the sheer volume of really high caliber people I run into in to mid- and upper-level ranks of the military and the rest of the national security community in particular. But those jobs don’t have real analogues in the private sector. It’s likely that people who are talented hospital administrators are more likely to work where they can make more money.

@James Joyner: I think we are in agreement. I guess I’m just venting a little because of the current so-called-conservative’s belief in the free market fairy, where the market makes all business well run. I value the free market as much as the next guy, but the way it works is that lots of mediocre to poor businesses survive because of their geographical or product line niche. The cultures of some of these companies are horrendously toxic. And where free market effects create benefit they do so by letting companies like these fail and a few more successful ones swoop in and take the most valuable customers and assets. I’m not saying this is a bad thing, although it is a frequently harsh one. But some things we really don’t want to fail. Power companies. VA hospitals.

And if you are thinking – “but I don’t hear about hospitals failing very often” well, that’s because state and large local officials and other administrators step in. Instead of reading “Metro General Hospital closes its doors” or “State Regional United files for bankruptcy” you read “Metro General is merging with…” The average hospital has been underwater since 2008 (or at least that was true in 2012 – I haven’t looked lately. Most of the rest have a profit margin (or net positive revenues for the non-profits) of less than 2%. When the Obamacare incentives turn to penalties, as they are scheduled to do, this will mean 1% then 2% then 3% off the top for all Medicare patients. By 2017 that will be more than 50% of hospitals revenue for the average hospital. So if they get a fine of 3% on the top of half their revenues, that’s effectively a reduction of 1.5%. For those hospitals operating at 1% profit, they are going under. I would say we should expect to see an acceleration of mergers and acquisitions, but I just don’t see how we can go any faster than we are now.

There may not be the talent pool of exceptional administrators that you are expecting. And at least some of those would willing work for a lesser salary at a hospital that is not going to merge with United Mega-Regional and toss them out on the street tomorrow.

Executive compensation at the very upper end is crazy. At the same time, you’re not going to be able to lure away a proven administrator who’s making $500,000—much less $1.5 million—a year if all you can offer is $181,500 and a dose of political bullshit.

Probably true, but I wonder if the difference in performance between a proven administrator and the kind of admin you can get for $181,000 is worth the price. In most human fields ability is a kind of pyramid; after the top few exceptions (your Euler’s and Gauss’s in math, your Shakespeare’s and Goethe’s in writing etc) the depth of talent broadens quickly.

Its like looking at the results of say the 100m sprint in the Olympics and realizing that although Usain Bolt is clearly the fastest runner in the world, his times are only about 5% better than the Olympic qualifying time, which a hundred or so runners achieve every year. Bolt’s earnings though are much more than 5% better.

@Doug Mataconis: There once was a time when men pledged “their lives, their fortune and their sacred honor.” . Nowadays, that is only good enough for the G.I. grunt. Their civilian administrators are worth so much more, apparently.